Grandfather Economic Report series
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This is page 2 of the Family Income Report, of the Grandfather Economic Report series, comparing trends facing families and youth to prior generations. (to return to page 1)
IMPACT OF TAX RATES, COMPARED TO PAST
|The charts on the preceding page show stagnant to
falling inflation-adjusted median family incomes for 24 years. That's before subtracting
taxes. The Grandfather Tax Report contains several charts
showing the tremendous increase in tax rates on today's working citizens, especially for
married couples, compared to prior generations. On April 15, 1997 (tax payment day)
newscasts reported that for 1996 the average citizen had to work 5.3 months of the year
just to pay all his share of combined federal and state/local government taxes - compared
to but 1.4 months required of workers several generations ago. That's a 400% increase
in tax-work load - - consuming 44% of an average worker's entire working time each
Also reported in the Tax Report, 1996 represented the highest inflation-adjusted taxes ($22,000) to federal, state and local governments ever paid in history for a median income dual-earner family. Another new, historic record negative to families. Tax Foundation's senior economist Arthur Hall.
We will show a couple of the tax charts from that tax report here. The following 2 charts provide some clues.
Federal Tax Rates up 1,250% for family of 4
|This chart compares the federal income tax rate for 1994 with that of
1948 for a family of 4 at median income level. (data: Family Research
Council, reported October 1996 by presidential candidate Steve Forbes, Impris)
The tax rate has jumped from 2% to 25% - - an increase in tax rates of 1,250%.
Primarily to fund entitlement programs of consumption.
Which reduced savings & productivity growth rates by 70% in the past 40 years.
This is one of the many negative impacts on family standards of living today, compared to prior generations.
The following chart shows additional impacts.
The Tax Report shows in 1996 43% of couples were penalized by tax laws for being married, compared to had they been un-married. This means they paid an extra $28 billion in taxes that year due to the marriage-penalty - - money that that could have been used to improve family finances by reducing debt and increasing savings, plus providing more funds to enhance choices for improving their children's education quality. By the way, the 1948 data point in the above chart for income tax was levied on individuals rather than couples. Now the married are penalized with higher rates.
Escalating Impacts Financing the Senior Generation 5 times larger than before
|This chart shows the increase in social security & medicare tax rates
on employee incomes - - today vs. 1950.
Such tax rates grew from a 2.96% rate to a 15.3% tax rate - 5 TIMES LARGER than today's seniors were paying out.
This picture understates the drain on families compared to the past, since the maximum salary taxed has escalated over the years - causing tax dollars paid to rise more than 1,000%, inflation-adjusted.
Despite paying a dramatically higher share of their income than did seniors, today's young, when they retire, will not receive anywhere near the benefits & purchasing power of today's seniors.
There is zero doubt families have lower living standards as a result of this imbalance.
And, just before family incomes ceased to grow, there were two major impacts on families: in 1968 Medicare was born and in 1972 Social Security pensions became inflation-protected - - both programs imposed significant added loads on family NET incomes, yet they were not inflation protected or given near-free health insurance that they had not contributed to.
As we saw in the first couple of charts, family incomes are stagnant and falling. Some will say, how can this be? M.I.T. economist Lester Thurow, 1996, ("the future of capitalism, pg 41): "If per capita incomes are up yet wages are down, someone has to be getting all that extra income. That someone is the elderly. The share of the elderly has doubled in the last 2 decades. It is they who are the big economic winners.
The first chart on page 1 shows stagnant to declining family incomes. Then, 2 charts showed (over a longer period) rising tax rates, including the impact of social security & medicare costs on families. With this squeeze, what do you think happened to the ability of families to save for their future, and to thereby enhance their security and future living standards? The following chart is the answer.
[the following comments include links to other reports in the Grandfather Economic Report series - - which show similar trends, regardless of the subject matter]
|As shown in the first chart above, the 1980's experienced a slight improvement in family incomes (although they since declined, again). But, the cost of higher education rose four times faster than family incomes 1982-92 (in this period, costs rose 4% annually vs. 1% for family incomes). Families had to borrow to finance such education, whereas prior generations did not. In 1992, 40% of the 14 million students in higher education at all levels relied on federal guaranteed loans - - up from 30% in 1982. This resulted in record debt build-up by students and families to obtain higher learning, compared to prior generations - - placing their living standards as young adults at greater risk.|
|The Grandfather Education Report documents today's primary & secondary public schools are not preparing students for the economy of tomorrow, as well as it prepared prior generations to meet the demands of yesterday - - despite the significant increases in inflation-adjusted spending per student by public schools- - now the highest in the world. Receiving less education quality than needed impacts earning potential of many families in their ability to be prepared for tomorrow's work place. Zero income growth, coupled with increased property taxes to finance public schools, reduced the choice of many families to use better-quality private or parochial schools. In this report, see the Education Productivity Index section, showing a 71% decline from 1960-1994.|
|Not so with foreign students. As shown in the Grandfather Foreign Exchange Report, the declining U.S. dollar made it easier for foreign students to attend U.S. universities. The sharp jump in the value of foreign currencies relative to the US dollar has greatly increased the number of foreign students with the financial ability to study abroad without debt, compared to U.S. students. A weak dollar coupled with increased foreign student demand may be one of the forces inflating university tuition, and thereby requiring more debt by American students. For U.S. students to consider studying abroad to broaden international knowledge, the weak dollar diminished such opportunities - compared to prior generations.|
|These forces have had a significant impact on the opportunity to acquire professional education in the important science, math and engineering categories - even in the U.S. The Grandfather International Education Report shows about half all new doctorates in these important disciplines graduating from U.S. universities are foreign students. The lower cost to these students (due to the higher value of their home currencies), coupled with better foreign high school quality, prepares these students to dominate science & engineering, and to therefore qualify for near-free graduate school funding via research & teaching assistantships from our universities. According to the 1993 National Science Board study, 80% of foreign graduate students are in this category of funding. Again, foreign students have a better chance to develop scientific careers in research, engineering and university teaching than American students, compared to prior generations.|
|Bottom Line : American students and families are at a disadvantage
concerning education, compared to prior U.S. generations and to today's foreign students -
due to a mixture of structural problems impacting their incomes and education quality.
It is clear that a possible strategy for a family competing in a global economy, which will provide a competitive advantage to the most technologically skilled work-force, is to make a major effort to significantly increase the math and hard science educational skills of every family member - from first grade through college. In the short-run it must be recognized this will require more families to invest in higher-quality education - - than now provided in a majority of public schools and colleges. Considering the trends of the above family income charts, this will be a great challenge - - which can partially be overcome if government will down-size its spending and resulting taxation.
In the meantime, families must pull out all the education stops they can for their main bread-winner and the kids.
Some CAUSES & ACTIONS
There are many theories presented as to the cause of these unacceptable findings. This author submits that part of the cause is the fact that excessive levels of federal and state/local government spending (primarily government entitlement programs), and regulatory compliance costs, relative to National Income, together with the level of total debt and a reduced international dollar, have eroded the true private sector and its ability to generate living standard improvement. Additionally, higher and higher tax rates mandated on families by federal and state & local government, much representing income transfers from families to seniors and welfare, has reduced net income, savings and productivity - helped push mothers to the work-force away from their children. A type of 'critical mass' has been exceeded. Slowing the growth rates of spending & regulation, and reducing deficits is insufficient. Spending & regulation cost ratios to economy size must be cut significantly and the debt principal must be amortized - - and family income, social security and property tax rates should be reduced to levels of prior generations.
The President's own economic report discusses much new government activity that should be energized to counter act this trend, such as the over-used political phrase of 'making government more productive'. But, nothing is mentioned concerning the actual down-sizing of government (and its mandated regulatory burdens), in real and absolute terms, to return to historic ratios of spending to national income - and thereby increase the share of the economic pie to the private sector that is not dependent upon government spending. Neither is there mention of the excessive levels of taxation at all levels of government which is eroding the private sector and net income of families. Further, the rising spending ratios of state & local government are not mentioned, although such spending is eating up more and more of the private sector's share of the economic pie, as if this is of no concern to our nation.
As a bottom-line cause: it is my opinion that family incomes are under pressure compared to the past because we have too much government with too much taxation & regulation, which is invested in socialized consumption instead national productivity, and with too little 21st century technical education quality in our public schools and colleges - - to allow more of our citizens to effectively compete in the increasingly more competitive global economy. Families should not wait for government bureaucrats & politicians to 'save them' - they must reduce their own consumption and invest more of their own productive time in high-quality education and savings. In other words, families must face the reality of the situation - - or suffer its consequences.
The following chart series shows the shrinkage of the private sector's share of the economic pie by the blue color, due to growth faster than the economy of the federal sector (red color) and the state & local government sector (yellow color).
The private sector's share (blue color) of the economic pie has been steadily reduced as the federal government
increased its share by 1,000% from chart 1 to 3 and as the state & local government
share increased 3 times faster than the economy since the middle chart. From an economy
where the private sector represented nearly 90% of our economy to the current situation
where the government sector is now nearly half the total economic pie.
Bottom Line: If it is a national objective to restructure such that there can be sustainable long term growth of real family incomes and standards of living, this can only occur if growth rates of savings & national productivity are significantly increased. But, these growth rates have declined in the past 40 years. Since most economists agree improvement of such must come from the private sector, then it stands to reason that the private sector must be increased in its share of the economy - - which can only occur by reducing the share of the economic pie now dependent upon government spending, together with significant decreases in mandated regulations impacting productivity, and tax rates.
An approach that should be considered is to study the inequities between families from the private sector (which are do not have their incomes inflation-protected by government mandates, or the same level of employer-paid health and pension benefits as government workers, nor the same lay-off protection) and government sector employees. Reducing the share of the economy dependent on government spending would be in the right direction. To help bring about more fairness, equity and equality between families, this should be undertaken by studying a combination of :
BOTTOM LINE SUMMARY of ACTION to IMPROVE FAMILY INCOMES
OUR CHILDREN AND GRANDCHILDREN DESERVE
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Copyright © 1997-2011 Michael W. Hodges. The Grandfather Economic Report series is the intellectual property of its author; all rights reserved under Copyright Conventions. Permission to redistribute all or part of this series for non commercial purposes is granted by the author, provided the associated web page address is included and full credit given to the Grandfather Economic Report and the author, Michael Hodges. Notice appreciated via email.